Activity Based Costing
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Activity Based Costing Replacement of peons with robots Ford can build a car with 33.9 labor hours; GM with 32.3 Hyundai plant: 90% of work completed by robots Increases manufacturing overhead Robot set-up isn’t related to units produced or machine hours Robot quality control isn’t related to units or machine hours But….if machine hours are used to cost products Some products are assigned costs that are too low You will make lots of those units because… And some products will be assigned costs that are too high Which means…
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Activity Based Costing. Replacement of peons with robots Ford can build a car with 33.9 labor hours; GM with 32.3 Hyundai plant: 90% of work completed by robots Increases manufacturing overhead Robot set-up isn’t related to units produced or machine hours - PowerPoint PPT Presentation
Transcript of Activity Based Costing
Activity Based Costing Replacement of peons with robots
Ford can build a car with 33.9 labor hours; GM with 32.3 Hyundai plant: 90% of work completed by robots Increases manufacturing overhead
Robot set-up isn’t related to units produced or machine hours Robot quality control isn’t related to units or machine hours But….if machine hours are used to cost products
Some products are assigned costs that are too low You will make lots of those units because…
And some products will be assigned costs that are too high Which means…
Activity Based Costing Assign overhead costs based on activities (cost drivers) Selecting appropriate cost driver
Unit costs: pickles for cheeseburgers Batch costs: cleaning shake machine for vanilla shakes Product costs: ketchup buyer Facility costs: rent and utilities
Activity Based Costing Identifying cost drivers
What are the activities completed by the enterprise? Possible drivers of costs
Product volume Batches Product related: only pizza requires an oven
Determine cost of each activity Peons Robots Utilities, rent, etc.
Cost of each activity is then used to calculate cost of product based on amount of activities necessary to produce product
Activity Based Costing
Uses of ABC Customer Costing
Whale curve Who is profitable? Who is not? Profit versus potential
Banks What customers would McDonalds like to fire?
Supplier Costing Price Quality
JIT Warranty Liability
Service Timeliness
Quality Management Prevention costs: prevent poor quality in
products or services Reduce failures
Engineering and design Training Supplier evaluation Field trials
Quality Management Assurance costs: products or services meeting
expectations Prevent defective goods from being shipped
Inspections Testing
Samples
Quality Management Internal failure costs: products or services
don’t meet expectations Detected before goods are shipped
Scrap Rework Shut down production Design changes
Quality Management External failure costs: products or services
don’t meet expectations After goods are shipped to customers
Recalls Lost sales Warranty claims Repairs Lawsuits
